Fitch Affirms Pinnacle's IDR at 'B'; Outlook Stable
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January 14, 2011
Fitch Ratings affirms Pinnacle Entertainment Inc.'s (Pinnacle) Issuer Default
Rating (IDR) at 'B'.
Fitch also affirms the company's existing ratings as follows:
--$375 million bank credit facility at 'BB/RR1';
--$450 million senior unsecured notes at 'BB/RR1';
--$735 million of outstanding subordinated notes at 'B-/RR5'.
The Rating Outlook remains Stable.
Pinnacle's 'B' IDR and Stable Outlook reflect the company's strengthening
competitive position in two core gaming markets, the prudent bottom-up building
of its capital structure, and the attractive debt maturity profile. The IDR and
Outlook also incorporate a negative near-term net free cash flow (FCF) outlook
related to development spending and the company's cash flow concentration in
markets that are vulnerable to increased competition.
OPERATING IMPROVEMENT EXPECTED TO CONTINUE IN 2011:
Operating performance improved by most measures through the first three quarters
in fiscal 2010 over the poor second half of 2009. Driving the improvement was
the expansion of margins; stabilization in revenues; and good ramp-up at the
River City, a St. Louis casino which opened in March 2010. EBITDA margins for
Pinnacle's Louisiana properties and Belterra Casino Resort returned to their
pre-recession ranges of 25%-30% and about 20%, respectively. The margin
improvements can be largely attributed to a renewed focus on operating
efficiencies and more targeted marketing/promotional spending. Fitch estimates
that 2010 revenue declined in Pinnacle's Louisiana and southern Indiana markets
by roughly 1% and 7%, respectively. Fitch's base case incorporates mid-single
digit revenue growth in 2011 fuelled by the continued ramp up in River City and
low-single digit growth on a same-store basis. Revenue growth in 2011 will be
supported by the economic recovery in Pinnacle's markets, including Dallas and
Houston areas (feeders for Pinnacle's Bossier City and Lake Charles properties,
respectively), as well as minimal new supply expected for 2011. Fitch's base
case incorporates the realization of additional efficiencies in Pinnacle's St.
Louis properties and the EBITDA margin there to level off around 20% (compared
to 17% in 2Q'10 and 19% in 3Q'10). Fitch's base case also incorporates a ramp-up
of Pinnacle's St. Louis properties to $70 million-$75 million of EBITDA over the
next couple of years.
BATON ROUGE PROJECT:
Fitch views the increased scope of the Baton Rouge project as credit neutral. In
September 2010, Pinnacle revised the expected cost of the project from $250
million to $357 million and also pushed forward the planned opening to late 2011
from the previously reported mid-2012. Fitch believes that the incremental
development and execution risks associated with increased cost and scope
(additional gaming space and doubling of the hotel rooms) of the project are
offset by Pinnacle's ample available liquidity and, in Fitch's opinion, the
strategic soundness of the increased scope. The latter consideration takes into
account the additional level of diversification Pinnacle will gain within
Louisiana, which addresses some of the concern related to potential gaming
legalization in Texas. Also, there are currently three bidders for the final
Louisiana gaming license, with two of the three applicants intending to build in
the Lake Charles area. The third applicant -- Penn National -- is vying for a
casino in a suburb of New Orleans, where it would compete with Pinnacle's
Boomtown New Orleans. The project may also provide Pinnacle with a third market
where the company will be the market leader, in addition to Lake Charles and St.
Louis. Currently, there are two properties operating in Baton Rouge, both of
which are relatively aged and do not provide the same level of amenities
expected from the Pinnacle property.
LEVERAGE AND COVERAGE:
On a latest 12 months (LTM) basis as of Sept. 30, 2010, reported consolidated
adjusted EBITDA was roughly $185 million compared to $1.2 billion in debt for a
debt/EBITDA leverage ratio of 6.3 times ([x] or 6.1x excluding the CEO severance
payment). Leverage would be below 6x according to the bank facility calculation,
which permits the annualization of EBITDA at River City. The IDR and the Outlook
incorporate an expectation that leverage may continue to trend in the low 6x
range through 2011, with the draw on the revolver to fund the Baton Rouge
project being offset by what Fitch expects to be modest EBITDA growth, primarily
from the ramp-up of River City. Likewise, Fitch estimates that interest coverage
should remain stable around 2x, relative to the 1.5x covenant. The maximum
leverage covenant in the credit agreement steps down to 7.25x by the end of 2011
and declines to 4.75x by the end of 2013, while the coverage covenant starts to
step up incrementally in June 2012 and peaks at 2.0x at Sept. 30, 2013.
FREE CASH FLOW PROFILE:
Fitch estimates pro forma annual gross interest expense of roughly $100 million
through 2011, assuming $185 million will drawn on the credit facility to fund
the Baton Rouge, LA, project, while annual maintenance capital expenditures will
trend around $40 million. Fitch's base case reflects Pinnacle's EBITDA (after
pre-opening expenses) at around $200 million and $210 million for 2010 and 2011,
respectively, implying a healthy discretionary cash flow profile. Spending on
the Baton Rouge project will pressure the FCF profile until 2012, and possibly
slightly beyond, if the video lottery terminals (VLTs) are approved at Ohio
racetracks. Fitch estimates that if legalization occurs, Pinnacle could spend
$100 million or more to develop its recent River Downs racetrack acquisition to
Pinnacle's maturity profile is attractive, with decent cushion relative to
covenant levels, $479 million of available liquidity as of Sept. 30, 2010 (pro
forma for $45 million purchase price for River Downs), no debt maturing until
2014 and solid operating cash flow. The primary liquidity concerns are largely
discretionary, centering on spending plans for the company's development
As of Sept. 30, 2010, Pinnacle's cash balance was $228 million, with roughly
$158 million available excluding the $70 million required for daily operations
and cage cash. Pinnacle's revolving credit facility was amended on Feb. 5, 2010,
pushing out its expiration to March 2014 from December 2010 and reducing the
commitment on the revolver to $375 million from $531 million. As of Sept. 30,
2010, the revolver was undrawn and approximately $9.6 million of LOCs were
outstanding, providing the company with a total of $524 million of available
liquidity ($479 million pro forma for the River Downs acquisition). Fitch
expects that the available liquidity plus the projected cash from operations
should amply cover Pinnacle's capital expenditures over the next two years. The
credit facility matures in March 2014 and the next bond maturity date is not
until June 2015 ($380 million 7.5% subordinate notes).
Based on Fitch's recovery analysis, and Pinnacle's prudent bottom heavy capital
structure, estimated recovery values are solid relative to their ranking in the
capital structure. Fitch rates both the bank facility and senior unsecured debt
'BB/RR1', estimating full recovery in the event of default based on the current
capital structure. The subordinated debt rating is 'B-/RR5' (11%-30% recovery
estimate), which benefited from the downsizing of the bank facility in February
2010 to $375 million from $531 million. As senior debt availability increases or
is issued, there could be additional rating pressure on the subordinated debt
Recovery Rating, and possibly the senior unsecured Recovery Rating.
POTENTIAL RATING DRIVERS:
Positive rating actions are unlikely in the near term given the planned
development spending and uncertainty related to potential competition, but
longer term the company's increasing diversification and solid market position
in two major markets are positive catalysts. In addition, if the company
continues to execute on its operational initiatives and stress its operational
focus, the credit profile would benefit. The following factors could contribute
to negative rating actions:
--Texas legalizes gaming in the 2011 legislative session;
--Baton Rouge project opens later than expected and/or significantly
underperforms relative to Fitch's expectations. Fitch's base case scenario
assumes the property ramping up to slightly over $40 million in EBITDA by 2013.
--A more severe than expected impact on Pinnacle's Belterra facility from the
2012 opening of the $400 million Rock Gaming/Caesar JV Cincinnati casino.
Fitch's base case scenario expects a negative impact of 25%-30% on Belterra's
EBITDA in 2013.
--A more severe than expected impact on Pinnacle's Louisiana properties from the
opening of one of the three proposed casinos, whose applications are now being
considered by the state. Two of the applicants plan to build in Lake Charles and
one (Penn National) in the New Orleans market. Since Pinnacle operates in both
markets, modest impact is expected regardless of the state's decision, but a
casino in Lake Charles would be a worse outcome. Pinnacle has a market share of
about 50% in the market.
Return to Louisiana Casinos.